Viewpoint: Are the Tories losing the free market faith?
- 9 October 2012
- From the section UK Politics
The financial crisis has made many on the political right question their faith in free market capitalism, but was the crisis caused by too much state interference?
As a passionate believer in free markets, I am worried the Conservatives are losing the faith. The financial crisis has brought capitalism into disrepute and the right now seems to agree with the left that unfettered markets are to blame. I think they are wrong.
To someone like me who believes in free markets, the language and policies coming out of the Conservative Party are alarming.
They talk of rebalancing the economy and regulating the banks. It is a far cry from Margaret Thatcher's radical programme of deregulation in the 1980s.
I am not surprised that the financial crisis has caused an ideological crisis on the right. The crash showed that our economic system is diseased, but I think the Conservatives have misdiagnosed the cause of the infection. They blame poor regulation, I blame government interference.
Matthew Hancock is typical of the new breed of Conservatives. Elected in 2010, he has already been appointed Minister for Skills and is a member of his party's Free Enterprise Group.
To me, Conservatives like Mr Hancock, are trying to redefine what it means to be a free market capitalist.
"I am a free market Conservative," he says. "I believe very strongly in the power of the free market to bring people out of poverty and to increase prosperity and for that market to work properly, it needs to have a strong framework.
"I think it's vital that we don't muddle up a laissez-faire approach - in which everything is left to be - with a free market, that has a strong framework."
This is a strange analysis from a supposed defender of free markets, especially when the government intervenes in the financial market in a way that clearly encourages banks to take excessive risk.
The government explicitly guarantees the deposits of ordinary customers, up to £85,000, and reliably bails out larger "wholesale" lenders when banks fail. This effectively subsidises the borrowing capacity of risky banks.
Luigi Zingales, a professor of finance and author of A Capitalism for the People agrees:
"The banks receive an implicit subsidy from the government in the form of this protection - they are too big to fail. This implicit subsidy allows them to access credit at a cheaper rate and that has fuelled their growth, their profits and also their risk-taking."
In a truly free market, if a bank went bust, the government would not repay deposits and savers would lose their money.
This might sound harsh, but that is the point. It would make us fussy about where we put our money.
Banks would then need to tempt savers, not with high interest rates achieved through gambling, but by being cautious.
This is not a policy the Conservatives are willing to adopt. Instead they want a regulator to force banks to behave sensibly and they blame the banking crisis on poor regulation.
Andrea Leadsom is another member of the Conservative party's Free Enterprise Group who worked in the financial sector before her election in 2010.
"We've seen the excesses of unbridled capitalism - where there were no limits on it - and now we're seeing a complete pushback," says Leadsom.
"I think what happened is because there was no real regulation on the size and scope of the banks, that's what led to the problems. If you go to the logical extreme of Free Enterprise you end up where some really clever person rules the world because there's nothing to stop them doing it."
Even more alarming for me than this new-found faith in regulators is the government's enthusiasm for industrial policy.
It has established a British Business Bank that will subsidise loans to some companies, and has assigned ministerial buddies to Britain's largest firms.
Ministers talk about rebalancing the economy away from services and towards manufacturing.
The Minister for Skills, Matthew Hancock, has explained the change in his party's thinking:
"Over the past 20 or so years, the government thought that it shouldn't have a view over the structure of the economy. I think that's wrong.
"We should find out what we're successful at, we should support that whilst always supporting challenger industries and being open to new industries that increasingly pop up."
'Morality of markets'
Mr Hancock denies this represents a return to a 70s-style economic central planning, but to me it is a significant departure from the more hands-off Thatcherite approach.
But one of Mrs Thatcher's closest advisers thinks I may have misjudged how far the Conservatives ever embraced free market thinking.
Lord Griffiths ran the Number 10 Policy Unit from 1985 until 1990 and says Mrs Thatcher was always concerned about the morality of markets.
"She did have a belief in the value of enterprise and the market economy, which I don't think previous leaders of the Conservative party really had, but she was never, in my judgment, the kind of free marketeer which she is sometimes made out to be.
"She believed in the market, but she also believed in the market within a boundary of social justice. For example, I remember on many occasions she'd really hit the roof to me privately about the compensation, for example, in the City."
He is right of course. I remembered Mrs Thatcher's free market rhetoric but forgot the interventionist reality. She had a regional policy and industrial planning. She bailed out the ailing car manufacturer British Leyland, regarding it as too big to fail, and for every privatisation, she created a regulator.
Laissez-faire is an inherently unattractive idea to politicians, including Conservatives.
They see it as their job to "run the country," including the economy. Alas, they can only run it into the ground.
Their various interventions create perverse incentives, misallocations of capital, cronyism, and enterprise-sapping uncertainty about the terms of trade.
The economy would do better if politicians would just let it go.